22 Aug, 2025
3 minutes
Trading leverage is a financial product that allows the trader to gain control of big positions in the market using borrowed money. Instead of committing the full cost of a trade, a trader pays a portion called margin, and the broker or exchange covers the rest. It is used in enhancing the possible profit as well as the possible loss.
The term is generally reserved for trading forex, stock, commodities, futures, and cryptocurrencies. Leverage varies across asset classes and exchanges - forex brokers will offer 1:500 leverage, while cryptocurrency exchanges will offer 2x, 5x, or 100x.
When a question is asked "what is leverage in trading?", it is asked only concerning how to derive maximum advantage from small market price movement. Yet, it also needs to be understood that though the leverage heightens the prospect of profit, it heightens exposure to risk as well. Unless risk management is properly done with it, positions undertaken on leverage very easily convert to humongous losses.
Leverage trading occurs by enabling you to maintain positions that are much larger than your balance in your account through the use of borrowed funds. Your broker or exchange requires you to keep a fraction of the notional value of the trade as collateral for the loan under an agreement.
For example, trading on 10x leverage, you can have a position of $10,000 with just $1,000 in your own capital. The remaining $9,000 is borrowed capital from the broker. Your profit and loss are both on the full size of the $10,000 position - not your margin deposit.
Leverage ratio: Expressed as 2x, 5x, 10x, 100x, etc., and indicates how many times your margin is being leveraged.
Margin requirement: Expressed as a percentage of the value of the overall position you need to bring in. For example, a 10x leverage would be a 10% margin requirement.
Liquidation risk: When the market is moving against you by some amount, your margin is exhausted, and your broker automatically closes your position to prevent you from taking additional losses.
Master these mechanics before you venture into advanced markets like forex trading, futures trading, or crypto leverage trading.
Crypto leverage trading is not unique from other markets like forex or futures but with higher risk volatility. In crypto leverage trading, you borrow money from the exchange to go long with a position larger than your account size using the deposited crypto or stablecoins as collateral.
All the big crypto exchanges offer leverage from 2x to 125x, but the trade with higher leverage creates profit and loss in bulk. For example:
Low Leverage (2x-5x): Ideal for swing traders or taker of lower liquidation risk.
Moderate Leverage (10x-20x): Most in demand by professional traders who are best able to vary the risk dynamically.
High Leverage (50x-125x): Typically used for very short term scalping or hedging and carries gigantic liquidation risk.
One of the most important facts is that funding rates can be applied to perpetual futures contracts in crypto trading. That is where depending on your position (long or short) and market funding rate, you will either receive or pay ongoing payments while in the trade.
Most crypto traders leverage to earn a profit from minor shifts in the values of coins like Bitcoin (BTC), Ethereum (ETH), or altcoins like Solana, Cardano, Polkadot without spending a huge amount of capital. As their prices are highly volatile and given that crypto markets are accessible 24/7, risk management is even greater compared to traditional markets.
Leveraged long position is when you take a borrowed money to buy an asset so that it can rise in value. In leverage trading, financial leverage raises your potential maximum profit as well as your potential maximum loss.
For example, you spend $100 and buy $1,000 of Bitcoin on 10x leverage when Bitcoin is $30,000 per coin. As soon as it rises by 5% to $31,500, your profit will be $50 without leverage, while with 10x leverage your profit is $500 minus fees.
But likewise, the reverse is also true. Had it declined 5%, your $500 loss would surpass your initial margin of $100, and the exchange will close out to limit losses.
This chart illustrates why it is so crucial to employ stop-loss orders, conservative position sizing, and risk management strategies when going long leveraged. The higher the leverage, the less a price move it will take to wipe out your margin.
Leveraged short position is where you borrow something in anticipation of selling it beforehand in anticipation that its price will fall so that you can buy it back at a lower price. Return as well as risks are enhanced in this manner through the leverage.
For example, with 5x leverage trading and $200, you can short sell a $1,000 Ethereum position at $2,000/ETH. At a 10% price drop to $1,800, you are in profit by $100 without leverage - with 5x leverage, however, you are in profit for $500 (before trading fees).
But if the price increases by 10% to $2,200, you'll lose $500, which is greater than your $200 margin. Your position will thus be liquidated by the exchange to prevent further loss.
Short selling with leverage is a great bear market strategy but must be monitored closely as sudden pumps against your position will find you getting liquidated at tremendous speed. Risk management techniques like stop-loss orders must be in place.
Leverage has the power to multiply a trader's potential earnings manifold, but so does increased exposure to risk. Both are considerations to keep in mind before using it in any market.
Gains magnified: Even small price movements can make huge profits.
Effective use of capital: Traders can hold larger positions with lesser amounts of initial capital.
Increased access to opportunities: Enables taking higher-cost trades or multiple positions simultaneously.
Amplified losses: Losses are also enlarged in the same way as profit.
Liquidation risk: Your positions can be automatically closed when you lack sufficient margin.
Emotional pressure: High leverage can lead to emotional trading choices and over-trading.
The remedy for astute leverage management is to use conservative multiples (e.g., 2x-5x for the majority of new traders), use stop-loss orders, and risk only what you can afford to lose. Too much leverage usage over a long period of time without a good risk plan will deplete your trading funds in no time.
To understand key approaches of trading with leverage traders have to understand what is leverage in trading and what is leverage in futures trading. Leverage trading is when you borrow from an exchange or broker so that you can maintain a larger position in your trade than your capital. You deposit a margin (part of the value of the trade), and the site pays for the remainder. Your gain and loss are calculated on the total size of the position, not your margin.
A 5x-10x leverage is adequate for a seasoned trader with a $100 account. Beginners must employ lower leverage (2x-3x) in order to manage risk in order to gain experience. High leverage has more liquidation opportunities.
With 20x leverage, you can trade a position size of $2,000 with $100 margin. While it offers maximum profit, all you need is a minimal price movement against you to spend all your margin very quickly.
If you know what is trading leverage, then you understand that the answer is no. 1:500 leverage is extremely risky, especially for newbies. Even when the price moves 0.2% against your trade, you can get liquidated. Newbies need to use much lower leverage until they fully understand risk management.
If your loss is equal to your size of margin, the position is closed out to minimize your loss. In normal situations, you lose just what you have deposited as margin but in extremely volatile markets, loss may exceed your deposit in case you have not employed stop-loss orders.
